As one of the world’s leading financial centers, Singapore has succeeded in crafting a reputation for lean governance and transparency. On Transparency International’s 2018 Corruption Perceptions Index, the city state scored third place out of 180 countries, right behind Denmark and New Zealand. Singapore’s score of 85 on a scale of 100 is nearly double the global average of 43.

However, while the leading countries in the survey all share strong institutions, high levels of development and respect for the rule of law, many also share one opening for corruption the Transparency International methodology fails to measure: the use of their banks as vehicles for money laundering. Indeed, despite its financial sophistication, Singapore has discovered its banking sector being used by corrupt outside actors for illicit dealings.

More than any other example of misconduct, the ongoing 1MDB scandal has forced Singaporean authorities to deal with the extent to which the country’s banks are vulnerable to abuse. The scandal, which has resulted in Singapore shuttering the operations of Swiss banks BSI and Falcon Private Bank and returning $11 million to Malaysia, has tainted the country’s stellar financial reputation but also placed it at the heart of a neighbor’s political crisis.

Repercussions From 1MDB

1MDB has already embroiled former Malaysian Prime Minister Najib Razak in corruption charges, amidst claims $681 million of stolen funds found their way into his private bank accounts. Prosecutors allege Najib and prime suspect Jho Low used the money to purchase everything from a $250 million yacht to a 22-karat pink diamond worth over $27 million. Investigations and criminal proceedings in Malaysia, Singapore and the United States have found Singapore-based bankers tied up in the scandal.

The Singaporean branch of BSI, for its part, claimed the Malaysian sovereign wealth fund as its largest client. While the Monetary Authority of Singapore shut down BSI’s operations in the country in 2016, the bank had already been raising red flags due to inadequate due diligence procedures. Chief among those warning signs: inspections in 2011, 2014 and 2015 which found the bank had repeatedly violated Singapore’s anti-money laundering regulations.

A number of other international banks have been linked to the case as well. Singapore fined Credit Suisse, UBS, Standard Chartered, DBS and Coutts, but global financial giant Goldman Sachs is by far the most embroiled. 1MDB proved deeply embarrassing for former Goldman CEO Lloyd Blankfein as he left the company last year. Working out of Singapore, partner Tim Leissner got the bank into bed with 1MDB in the first place, via the underwriting of $6.5 billion in bonds. The firm’s actions in Singapore have ricocheted internationally, with Goldman’s new CEO fielding questions about the affair to this day.

Are Freeports the Next Loophole?

This heightened attention to Singapore’s financial industry shouldn’t come as a surprise, given the rising trend of increased scrutiny targeting the global financial capitals. Banks, though, are not the only potential vehicle for laundering money. Another major financial loophole is emerging in the form of “freeports”, massive warehouses used by wealthy patrons to store and move fine art, wine, classic cars and various other luxury items without tax. A growing number of watchdogs suspect these freeports, including one operating in Singapore since 2010, could serve as vessels for money laundering.

The debate over freeports has become especially heated in the European Union, where a parliamentary report released in March brought focus to the use of freeports as de facto parallel markets used by wealthy individuals and companies to conduct transactions completely devoid of oversight and transparency. The report’s findings have led to calls from the European Parliament to abolish freeports entirely. MEP Anamaria Gomes described to the BBC how freeports constituted “a way that could be easily used to store goods away from anybody's control, for putting them in the dark when it's more convenient, avoiding tax,” while one of her colleagues labeled freeports a “crime blind spot.”

These and other parliamentarians have criticized European Commission leader Jean-Claude Juncker for failing to act on the matter, especially as one of Europe’s most prominent freeports happens to be located in his native Luxembourg and opened during his tenure as prime minister. At the time, Juncker supported the freeport project while actively obstructing European tax transparency reforms.

A Common Thread: Yves Bouvier

Singapore has a direct link to the fight taking place in Europe, as the official residence of Swiss businessman Yves Bouvier. Bouvier, a permanent resident of Singapore since 2009, is the main shareholder in the Luxembourg freeport and operates Singapore’s own large freeport near Changi Airport. Over the past several years, Yves Bouvier has been implicated in a number of cases of unpaid taxes and fraud, with Swiss officials investigating allegations that he could own 165 million Swiss Francs ($145 million) in back taxes. Yves Bouvier was at one point arrested in Monaco as a result of criminal complaints filed by former client Dmitry Rybolovlev. Other figures in the art world, including Pablo Picasso’s stepdaughter Catherine Hutin-Blay, have also accused Yves Bouvier of involvement in illegally acquiring high-value artwork.

And like BSI before it, the Singapore freeport has raised suspicions among regulators. As far back as 2016, the issue was flagged by the National Risk Assessment (NRA) of Singapore’s monetary authority and the Financial Action Task Force (FATF), an inter-governmental body that develops policies to protect the global financial system against money laundering. As in Luxembourg, however, Yves Bouvier’s venture enjoys the backing of high-ranking officials. The Swiss businessman’s senior counsel Edwin Tong went on to be named Senior Minister of State in the Ministry of Law last year, and the Singapore Freeport’s customers include Deutsche Bank and Christie’s.

As the issue of banking secrecy, safe havens and freeports attract increased global scrutiny, the notoriety of such practices in Singapore could do indelible harm to its financial reputation. Even as the city-state struggles to come to terms with the aftereffects of 1MDB, is it allowing another major loophole in financial transparency to take shape under its nose?